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Facts
The Revenue appealed against the deletion of an addition made under Section 41(1) of the Income Tax Act. The addition was related to outstanding liabilities to creditors for over three years, which the Assessing Officer considered as a cessation of liability. The CIT(A) deleted this addition.
Held
The Tribunal held that for Section 41(1) to apply, there must be an actual cessation or remission of a trading liability. Merely because a debt becomes unenforceable due to the limitation period does not amount to cessation. Since the assessee continued to acknowledge the liabilities, Section 41(1) was not attracted.
Key Issues
Whether outstanding liabilities that have remained unacknowledged by creditors for a long period constitute cessation of liability under Section 41(1) of the Income Tax Act.
Sections Cited
41(1), 143(3), 133(6), 18
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Income Tax Appellate Tribunal, DELHI BENCH: ‘B’ NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI S. RIFAUR RAHMAN
Assessment Year: 2014-15 Vs. M/s. Ganpati Builatech Pvt. DCIT/ACIT (OSD), Range-10, Ltd., 6, Ganpati Apartment, New Delhi Alipur Road, Civil Lines, Delhi PAN: AACCG4248F (Appellant) (Respondent) Assessee by Sh. Manish Malik, Adv. Sh. Vinod Gupta, CA Department by Sh. Rajesh Kumar Dhanesta, Sr. DR Date of hearing 01.07.2025 Date of pronouncement 01.07.2025 ORDER
PER SATBEER SINGH GODARA, JM
This Revenue’s appeal for assessment year 2014-15, arises against the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [in short, the “CIT(A)/NFAC”], Delhi’s DIN and order no. ITBA/NFAC/S/250/2023-24/1055284169(1), dated 21.08.2023 involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). Heard both the parties. Case file perused.
Coming to the Revenue’s sole substantive grievance seeking to revive the Assessing Officer’s action invoking section 41(1) cessation of liability addition of Rs.4,32,32,135/- made in the course of assessment framed on 16.12.2016; we note that the CIT(A) has reversed the same by the following lower appellate discussion: - 4.1 The appellant in his reply stated that, Grounds No.1 and 4 are general grounds which require no separate submissions. Ground 2(1), 2(ii) and 3 assails the action of AO in making the addition of Rs. 4,32,32,135/- on account of the static creditors outstanding in the books of accounts u/s 41(1) of the Act. In this regard, it is submitted that there is no remission or cessation of these liabilities as these liabilities are still outstanding in the books of accounts of the appellant company. (we are enclosing herewith the copy of Balance Sheet and Profit & Loss account of appellant company as Annexure-1 for your kind reference) The appellant company still acknowledges the debt. Further, it is stated that there is nothing on record that these parties have done something to forego their claim and the appellant company acknowledged these liabilities in their books of accounts. It is stated that the Assessing Officer during the course of assessment proceedings acknowledged the fact that the liability is still outstanding in the books of accounts of the appellant and the same is not written back in profit and loss account of the appellant. It is also evident that these liabilities have not been rescinded or ceased to exist. There is nothing in the act that these liabilities ceased to exist after the expiry of 3 years or forever they have become time barred, and thereby the provisions of sec 41(1) of the I.T. Act operates. That the time barred or static liability and the enforceability thereof is applicable to the court proceedings where under certain circumstances creditors are debarred from enforcing their rights in the Courts but there is no corresponding provision under the 1.T. Act, 1961 to bring to tax such liabilities where such liabilities are acknowledged liabilities. Kind reference is invited to the Judgments
2 | P a g e in case of M/s Shri Vardhman Overseas Ltd (Del) 343 ITR 408, which is annexed as Annexure-2. In view of the above, The Hon'ble Commissioner of Income Tax (Appeals) may be pleased to delete the addition made u/s 41(1) of the Act.
I have carefully perused the facts highlighted in the assessment order, the written submission filed by the appellant during the appellate proceedings and various judicial pronouncements available on the issues under the appeal. In the scrutiny assessment, the Assessing Officer noticed that balances of creditors had been outstanding since three years. Balance confirmation was received only from one creditor that too with a difference in credit balance. Therefore, she added the balance amount as Income of the assessee under section 41(1). The only issue raised by the Assessing Officer was that since the outstanding balances had remained static in the books of the assessee for around three years, there was no possibility of any claim being made by the creditors and the amount of liabilities outstanding were liable to be added as income of the assessee. The Supreme Court in the case of CIT v. Sugaull Sugar Works (P.) Ltd. [1999] 236 ITR 518/102 Taxman 713 held that section 41(1) contemplates obtaining by the assessee an amount either in cash or any other manner or any benefit by way of cessation or remission of liability. In order to come within the sweep of section 41(1) it is necessary that the benefit derived by an assessee result from cessation or remission of a trading liability. The only issue that needs to be considered is whether the liability towards the creditors has ceased on account of efflux of time. The Supreme Court in the case of Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay AIR 1958 SC 328 clearly held that even in cases where the remedy of a creditor is barred by limitation, the debt itself is not extinguished but merely becomes unenforceable. As held by the Bombay High Court, in the case of J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34, cessation of liability may occur either by the reason of the liability becoming unenforceable in law by the creditor coupled with debtor declaring his intention not to honour his liability, or by a contract between parties or by discharge of the debt. In the present case, the assessee is acknowledging the debt payable to the creditors and there is no material to indicate that the parties have contracted to extinguish the liability. Thus, it cannot be concluded that the debt owed by the assessee to the creditors stood extinguished.
3 | P a g e Although, enforcement of a debt being barred by limitation does not ipso facto lead to the conclusion that there is cessation or remission of liability, in the facts of the present case, it is also not possible to conclude that the debt has become unenforceable. It is well settled that reflecting an amount as outstanding in the balance sheet by a business entity amounts to the business entity acknowledging the debt for the purposes of section 18 of the Limitation Act, 1963 and, thus, the claim by the creditors can also not be considered as time barred as the period of limitation would stand extended. Even, otherwise, it cannot be stated that creditors would be unable to claim a set off on account of the amount reflected as payable to it by the assessee. It is well settled that in order to attract the provisions of section 41(1), there should have been an irrevocable cessation of liability without any possibility of the same being revived. Admittedly, no credit entry has been made in the books of the appellant in the previous year relevant to the assessment year 2014- 15. The outstanding balances reflected as payable to creditors are the opening balances which are being carried forward for years. The issue as to the genuineness of a credit entry, thus does not arise in the current year and this issue could only be examined in the year when the liability was recorded as having arisen. The Assessing officer having accepted the balances outstanding over years, it was not open for the AO to make the addition on the ground that the assessee could not produce sufficient evidence to prove the genuineness of the transactions. A very similar case came up with the jurisdictional ITAT in the case of (Delhi Trib.) Satpal & Sons (HUF) v. ACIT Circle-38(1), New Delhi [2017] 85 taxmann.com 283, wherein which the honourable ITAT had held that "Where assessee had shown outstanding sundry creditors for last three years in its balance sheet and no provision was, made to write-off outstanding liabilities in its books of account, there would be no remission or cessation of liability under section 41(1) even if sundry creditors were not in existence at address provided and PAN of creditors were found to be invalid." Similar view is taken by the honourable jurisdictional High court Delhi in the case of [2013] 35 taxmann.com 540 (Delhi) Commissioner of Income-tax, Delhi - II v. Jain Exports (P.) Ltd. Respectfully following the jurisdictional hierarchy, it is hereby held that the addition made by the AO under the head cessation of liability u/s 41(1) is unwarranted and hence liable to be deleted. This ground is allowed.
In the result, appeal of the appellant is allowed.” 3. We have given our thoughtful consideration to the Revenue’s and assessee’s vehement rival submissions reiterating their respective stands. Learned departmental representative invites our attention to the Assessing Officer’s assessment discussion at page 1 para 3 onwards that he had sought to verify the assessee’s claim by issuing section 133(6) notice(s) to the concerned parties, which could not be verified; and, therefore, he proceeded to invoke section 41(1) of the Act as the said creditors could not be found to have existed in support of the taxpayer’s claim. 4. The assessee’s draws strong support from the CIT(A)’s above extracted discussion deleting the impugned cessation of liability addition. It is in this factual backdrop that we sought to verify the clinching fact that as to whether this is an instance of actual cessation of the impugned liability(ies) going by section 41(1) of the Act or that of a deemed cessation by efflux of time sought to be applied in the Assessing Officer’s assessment. We are informed that there is no actual cessation of the impugned liability in the assessee’s books. That being the case, we hereby quote PCIT v. Soorajmull Nagarmull (2024) 466 ITR 248 (SC) that the impugned statutory provision does not apply in absence of any such actual 5 | P a g e cessation or remission of the trading liability to uphold the learned CIT(A) in the impugned lower appellate discussion. We accordingly find no reason to interfere with his lower appellate findings deciding the instant issue in the assessee’s favour in very terms. Ordered accordingly.